Myanmar has hinted at awarding 30 offshore oil and gas blocks – 11 shallow-water and 19 deepwater blocks – on flexible terms by early next year after concerns were raised by global companies.

Aung Kyaw Htoo, deputy director for the country’s energy ministry, told potential investors and contractors during an industry meeting in Yangon that participating companies “could set in their bids how much of the profits they want to share” with Myanmar’s government.

“Profit split is very important for both sides,” Htoo told The Irrawaddy magazine. “In the offshore area, generally 60% to 40% – 60% for government, 40% for investor – that is our preferable business scale. But all of you investors can submit what’s your scale.”

Existing production-sharing contract (PSC) terms for profit split give private companies a maximum of 40% of profits for most projects and 45% for offshore projects at a depth of more than 610 m (2,000 ft).

Htoo admitted that under the government’s favored terms – when royalties of 12.5%, all taxes, and other factors are taken into account – the total government take from oil and gas revenues would increase to 81.4%.

The Myanmar government has increased royalty payment (payable in available petroleum) and state equity in discovered fields to 12.5% and 25%, respectively, in the new model PSC, up from 10% and 15% in the previous model.

Investors are cautious

Despite the introduction of new PSC regulations and foreign investment law, oil and gas companies are cautious about on jumping into the country’s upstream sector. They are assessing the complex legal and commercial issues involved in exploration and development of oil and blocks. Local partnerships, restrictions on foreign ownership, complicated governing laws, and ineffective rule of law are among the concerns raised.

Local partners. The model PSC stipulates investors must have a local partner for E&P in all shallow-water and onshore blocks. The percentages of the local and foreign partners’ ownerships are left up to the involved parties. A list of possible joint venture partners have been put on the energy ministry’s website. Investors of deepwater blocks, however, are exempted from partnering with local companies. This is in addition to the operator’s obligation to offload up to 25% interest to state-owned Myanmar Oil and Gas Enterprise (MGOE).

Such partnerships with inexperienced local companies, however, could create management challenges for global companies.

Governing laws. Potential investors have raised concerns about governing laws for exploration and development of oil and gas blocks since the existing laws are outdated. The governing laws, mostly prepared during colonial British rule, have been seen as complicated and not investor friendly. The local industry is mainly governed by nine laws, which include Oilfields Act 1918, Oilfield Rules 1936, Petroleum Act 1934, Oilfields (Labor and Welfare) Act 1951, and Myanmar Petroleum Concession Rules 1962.

According to the model PSC, “Contract[s] shall be governed by and construed and interpreted in all respects in accordance with the laws of Republic of the Union of Myanmar, and the parties hereby agree to submit to the jurisdiction of the relevant Court of Myanmar and all courts competent to hear appeals therefrom.”

Dispute resolution. The current model offshore PSCs provide for arbitration according to the UNCITRAL Arbitration Rules. Yangon has agreed to join (without reservations) and become a contracting state of the New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards.

Limits on foreign ownership. Notifications issued by three government agencies have raised doubts about ownership of foreign companies. The Foreign Investment Law 2012 and Myanmar Investment Corporation Notification 1/2013 do not impose any foreign ownership restrictions for oil and gas exploration, while Notification 11/2013 of the national planning and economic development ministry sets restriction of foreign ownership at 80%.

Employment to locals. The model contract mandates a contractor employ qualified citizens of Myanmar to the maximum extent possible. The foreign investment law says that all unskilled jobs are to be given only to Myanmar nationals and skilled jobs to the locals over a period of six years. It prescribes specific proportionate local employment thresholds to be complied in stages during the first six years of operation – 25% of the skilled workforce must be Myanmar nationals within the first year, 50% within the second year, and 75% within the third.

Local procurement. The model PSC requires contractors to use 25% of their annual budgets to procure goods and services either available in Myanmar or rendered by Myanmar nationals. It also contains a general requirement that contractors give preference to Myanmar goods and services when they are available locally and so long as they are of comparable quality, price, and availability. The previous PSC allowed operators to undertake offshore oil E&P works though a 100% foreign-owned contractor.

Besides, the investors are exposed to the political risks. The economic and political reform process in Myanmar is in its early stages. Several insurgent groups are still active in the western and eastern parts of the country and could derail the democratization. Ethnic riots, particularly clashes between Buddhists and Muslims in Rakhine state, have become a security risk.

There also are concerns about the independence of the judiciary and the effectiveness of the rule of law. Investors have raised doubts over the resolution of commercial disputes with international firms in an impartial manner. Several regulations left from the socialist period could be obstructive for global investors.

The US government has lifted economic sanctions on Myanmar, but certain economic restrictions that make American firms report their operations in Myanmar are still in force.

Global investments are crucial

Myanmar, which was isolated from the global economy for about 50 years until 2011 due to military rule, is willing to address concerns raised by the global investors. Energy ministry officials say they would consider the issues raised by investors and award 30 offshore blocks offered in the new bidding round on flexible terms.

Deputy Energy Minister Myint Zaw said his ministry had shortlisted 61 companies as prequalified bidders to participate in the tender for 30 offshore blocks. These companies include Shell, ConocoPhillips, ExxonMobil, Chevron, Total, Statoil, Eni, Repsol, Anadarko Petroleum, Husky Energy, Hess, Murphy Oil, Premier Oil, Woodside Energy, Santos, and Delek Energy. Asia’s national oil companies such as China National Petroleum Corp., Korea National Oil Corp., Korea Gas Corp., Thailand’s PTTEP, and Nippon Oil & Gas Exploration Corp. also are in the race.

“We are planning the award of the offshore blocks by 1Q 2014,” the minister said. “Myanmar is awaiting technology, expertise, and funds to discover new reserves of petroleum.”

Myanmar, which transformed from a lead oil producer to net importer, is desperate to attract foreign investments to tap vast hydrocarbon resources in the country, which are between an estimated 1.8 Tcm and 2.2 Tcm (60 Tcf and 72 Tcf) of gas and 540 MMbbl of crude oil. The energy ministry said the size of the hydrocarbon reserves is likely to go up, considering a large part of offshore areas in the Bay of Bengal is unexplored.